The Rudd Government’s first budget did not deliver Robin Hood, but has almost delivered Pinocchio. The Swan inflation narrative is now entirely discredited. He had sought to blame the previous government for the high levels of cost-push inflation the economy is currently experiencing.

He made a song and dance about the inflation genie being out of the bottle only to have that metaphor flatly denied by the RBA Governor on 4 April. Swan had also spoken of the need for a tough budget to control inflation. On that score he has failed.

His failure can be seen on two fronts. First and foremost, spending increased in real terms from last year. In no way can the budget be said to have cut spending. The most generous interpretation is that the Rudd government have reduced the rate of increase in spending. This does not augur well for future spending. Indeed, this budget accelerated one of the Howard government’s worst budget features — the off-balance sheet slush fund.

The second comparison is to look the budget relative to last year’s projections. For all we heard about efficiency dividends and razor gangs, the expenditure on general public services is up. The other numbers are not dramatically different. The rhetoric has changed but the overall spending pattern was in place before the election. So much for Brutopia.

Some of the detail within the budget is troubling. The Rudd government made much of the alcopop tax increase — to reduce binge drinking. Indeed, in economic circles such a policy is known as Pigovian taxation and has certain respectability. We should expect to see a decline in alcopop consumption and so revenue from this measure should be low. Yet, that is not what we see. Revenue from RTD excise is forecast to grow faster than inflation.

Health Minister Nicola Roxon told the ABC that the change to the Medicare Levy Surcharge would have an uncertain impact on private healthcare membership. Yet the budget shows a $660 million cost to revenue over four years and expenditure on the private health care rebate to decline by $959.7 million. This implies that Treasury expect a lot of people to drop out of private cover. Means testing the baby bonus is said to have a saving of $354.5 million over four years. That implies about 17,750 babies per year will miss out. This number is massively overstated.

Where does this Budget leave us? Swan has argued inflation is out of control, yet does little to address this. The budget itself indicates unemployment will rise. Slush funds to finance future spending are being established and some of the numbers in the budget are dodgy. Existing policy has been relabelled and repackaged.

Rather than taking some of the froth off the economy, this is all froth and no cappuccino budget.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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